U.S. seals mortgage settlement with top banks

Federal and state officials announced Thursday morning a $25 billion settlement of a long-running probe into allegedly shoddy foreclosure practices at the nation's five largest banks, a deal that will include more than $1 billion in assistance to former and current Illinois homeowners.

The agreement between the federal government, state attorneys general and the five banks -- Bank of America, JPMorgan Chase, Wells Fargo, Citibank and Ally Financial formerly known as GMAC -- will not help former homeowners get back properties they lost to foreclosure, even if there was wrongdoing by loan servicers in the foreclosure process. Nor will its limited scope assist all current homeowners who find themselves in financial straits or severely underwater. Most notably, the agreement does not cover mortgages held by Fannie Mae and Freddie Mac.

Still, the deal will provide some relief to financially distraught homeowners in danger of losing their homes while making it easier for current borrowers to refinance. The settlement, a year in the making, also seeks to reform mortgage servicing practices to lessen the chances of similar problems occurring again.

It is the largest joint state-federal settlement in history and involves banks that collectively service almost 60 percent of the nation's mortgages.

"Holding these banks accountable is what this settlement is about and helping the millions of families harmed by this crisis," said Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development at a Washington announcement with federal officials and state attorneys general, including Illinois Attorney General Lisa Madigan.

The announcement ends a lengthy investigation at the federal and state level into allegations of fraudulent foreclosure practices and "robo-signing" of key mortgage foreclosure documents by mortgage servicers. While it releases the five banks from servicing, foreclosure and loan origination lawsuits by state and federal agencies, it does not give them immunity from criminal prosecutions or prevent homeowners or investors from pursuing their own suits.

The $25 billion is a combination of cash payouts to consumers and 'credits' given to the banks for actions they take to help people keep their homes by arranging more affordable payment terms.

The majority of Illinois' $1-plus billion will be used to offer assistance to three types of consumers, according to people familiar with the agreement. Former borrowers who lost their homes to foreclosure between January 2008 and last year will be eligible for as much as $2,000 if they indicate on a form to be sent to them that they were the victim of shoddy mortgage practices such as lost paperwork during the loan modification or foreclosure process.

Delinquent borrowers who are underwater on their mortgages may be eligible for a writedown of the outstanding amount owed on their mortgages, which in effect will modify their mortgage.

Finally, borrowers who are current on their mortgage payments but unable to refinance because they are underwater, meaning they owe more on the mortgage than the current market value of the home, will be eligible for loan refinancings at lower, but not the lowest, interest rates.

Nationally, a minimum of $17 billion will go directly to homeowners, with the bulk of it to be used for principal reductions, $3 billion for refinancing the mortgages of underwater borrowers and $1.5 billion for payments to consumers who lost their homes to foreclosure. Another $2.6 billion will go to states to use in foreclosure prevention programs, said people with knowledge of the deal and the federal government will receive $750 million.Donovan said, though, that the actual value of the principal reduction portion of the plan will be closer to $32 billion because servicers will receive less than 100 cents on the dollar to write down the loan amounts on severely delinquent loans.

Companies have three years to implement the plan and fulfill the refinancing commitments.

But as with other efforts that have come out of Washington in a bid to ease the nation's housing crisis, a long list of eligibility criteria and caveats will limit participation and narrow the pact's scope. Much of the program is limited to customers whose loans are held in the portfolios of the five banks themselves, or, in some cases, by private investors.

Also, the settlement does not apply to other mortgage servicers, some of whom remain the subject of government investigations.